Market questions abound

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Published: August 13,2007

Even by historical standards, it’s been a wild ride for market investors lately. On July 17, the Dow Jones Industrial Average topped 14,000 points for the first time in history before closing at 13,971. Two days later, it managed to close above the 14,000 mark.

Then, it headed south. During the July 26 trading session, the Dow Jones was down nearly 450 points. The market rallied, but still closed down 311 points.

That same day, the NASDAQ fell nearly 49 points, and the S&P 500 shed approximately $300 billion worth of value. Good trading days have been few and far between ever since.

Investors and analysts are asking questions. What prompted the stellar rise and precipitous fall? And what can we expect from the stock market going forward?

Peaks and valleys

The Dow Jones did not just set a new record in mid-July; it did it at warp speed. It only took 57 days for the index to go from 13,000 points to 14,000. By comparison, the market needed 129 days to rise from 12,000 to 13,000.

However, as Julius Ridgway, portfolio manager at Medley & Brown in Ridgeland, points out, the Dow is only composed of 30 industrial stocks, and, thus, is not the absolute barometer of how well the stock market is doing as a whole.

Still, it was an impressive rise, not all of which could be attributed to factors here at home. The stock market’s performance of late illustrates the growing importance of the global market place.

Ridgway says that some of the domestic markets’ growth can be attributed to the gains seen in the countries that make up the “BRIC” (Brazil, Russia, India and China). That global growth benefited such domestic giants as Caterpillar and Boeing.

However, Ridgway feels those foreign markets cannot sustain their gains without U.S. dollars. In other words, it is a two-way street.

“American consumption is fueling those foreign markets,” he says. “I don’t believe China can keep growing without American spending.”

Stacey Wall, president and CEO of Pinnacle Trust Company, is equally tepid on foreign stock markets. “Globally, stocks have been a good place to be for quite some time, particularly emerging markets. However, recently we’ve begun to see some deterioration in global breadth,” Wall says.

While the Dow set a new record high in July, it has quickly lost most of that gain, and it has lost it an equally quick pace. August 3 was yet another bad day for trading, with the Dow Jones closing at 13,182. The S&P lost nearly 40 points and the NASDAQ nearly 65.

The major culprit is housing and corresponding credit worries. Those concerns were increased August 3 when American Home Mortgage announced it was closing most of its operations and laying off thousands of employees.

The housing meltdown has made lenders very wary. Credit is the grease for economic growth. When lenders sit on their money, the economy suffers.

Wall points out, though, that there is more to the U.S. stock market’s woes than housing/credit worries.

“As always, there are multiple reasons why we’ve seen recent weakness in stocks,” Wall says. “The market was overbought on both a short- and intermediate-term basis. Gas prices and inflation pressures have been increasing. And rising interest rates have meant more competition for investors’ dollars.

“At the beginning of the year, we recognized that the stock market was benefiting from high and rising profit margins, increased activity in mergers and acquisitions, and investor confidence that the Fed was having success at pulling off a soft landing for the economy. While profit margin and merger and acquisition activity remain intact, the resurgent uptrend in oil prices, decisive depreciation of the U.S. dollar, continued weakness in the housing market and a sharper-than-expected contraction in earnings growth has all contributed to cloud the picture.”

Looking ahead

Ridgway says Medley & Brown does not make predictions about U.S. stock market performance, but the firm remains bullish and is not running in a panic to the bond market. He says the firm remains fully invested, and recommends to its clients to stay the course.

Wall is known for his annual economic prognostications, and he, too, is not in a panic mode. He feels economic growth will pick up. However, he is touting caution, particularly when it comes to foreign stocks.

“As far as the economy (goes), the underlying trend is not as poor as suggested by the mere 0.6% growth in GDP for the first quarter. I think that the economy will be growing closer to trend (2.5%) by the end of the year,” he says.

Wall says the aforementioned global concerns “along with persistent negative momentum in bonds and weakening relative valuations have caused us to reduce our exposure to international stocks. While international stocks may still have a little room to run, we prefer to err on the side of caution.

“For the domestic stock market, I gave the bulls the benefit of the doubt during the first half of this year, but I’m going to be very careful during the second half. As I’ve said before, we’re still in the theater enjoying the show, but we’ve moved close to the exits in case someone yells ‘fire.’”

Contact MBJ staff writer Wally Northway at northway@msbusiness.com.

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